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Title: Riding the South Sea Bubble

Author(s): Peter Temin and Hans-Joachim Voth

Publication Date: January 2004

Keyword(s): bubbles, investor sentiment, south sea company and speculation

Programme Area(s): International Macroeconomics

Abstract: The efficient markets hypothesis implies that, in the presence of rational investors, bubbles cannot develop. We analyse the trading behaviour of a sophisticated investor, a London goldsmith bank, during the South Sea bubble in 1720. The bank believed the stock to be overvalued, yet found it profitable not to attack the bubble. Detailed examination of daily transactions in the London stock market shows that ?riding the bubble? was a highly profitable strategy. These findings lend support to recent theoretical work arguing that predictable investor sentiment may prevent rational investors from attacking a bubble.

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Bibliographic Reference

Temin, P and Voth, H. 2004. 'Riding the South Sea Bubble'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4221